FINANCIAL
MANAGEMENT :
BUDGETING PROCESS
What is a budget?
Budgets are an element of an
organization’
organization’s financial management;
financial management addresses the
overall fiscal integrity of an organization
and is an ongoing process.
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A more useful definition would be…
be….
“…a
“…a statement of allocated expenditure
and/or revenue, under specific
headings, for a chosen period”
period”.
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Lesson 7: Financial
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Overall planning and budgeting process
may be divided into three stages:
 Development of objectives for information unit
(planning)
 Preparation of the budget (budgeting)
 Monitoring of performance against budget
(financial reporting & accounting)
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Budgeting Basic
The fundamentals of a budget are:
a) It is prepared to cover a defined period.
b) It is approved in advance of the period to which
it refers.
c) The data used in its preparation are
documented for future reference.
d) Qualitative, quantitative and fiscal information
are all combined in the budget process.
e) It defines processes that are to be adopted in
order to ensure that the organization’
organization’s goals.
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Planning should be the first stage in the
financial and budgetary process.
In terms of terminology budgets may be
variously described by their type and
method of preparation.
a) Budgeting based on preparation methods.
b) Budgeting based on type of expenditure.
c) Budgeting based on management input.
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a. Budgeting based on preparation
methods
Ranging from LineLine-Item to Zero Based
Budgeting.
Many ways to prepared and presented
the budgets.
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b. Budgeting based on type of
expenditure
Operating or revenue, budget represent the
routine day to day budgets which provide
the authorization for general expenditure.
Capital budgets represent funds for major,
oneone-off, purchases for which special rules
apply.
– In most cases these cost are not included in
the annual operating budget at full cost in the
period of purchases through provisions for
depreciation.
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c. Budgeting based on management
input
Budgets may be directive or participatory;
– Directive budget will be imposed by the
information manager’
manager’s management team.
– Participatory budgets will require the
information unit to undertake the preparation.
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Lesson 7: Financial
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Budget Preparations:
Although many types of budgets exist, most
libraries employ one of these following six types
of budgets:
1)
2)
3)
4)
5)
6)
LineLine-Item Budgeting
Formula Budgeting
Program Budgeting
Performance Budgeting
Planning Programming Budgeting System
Zero Based Budgeting
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LineLine-Item Budget
The lineline-item budget represents the simplest
and most commonly used budgeting method.
It divides objects of expenditure into broad input
categories. For examples,
–
–
–
–
–
Salaries and wages
Materials and supplies
Equipment
Capital expenditure
Miscellaneous.
Further subdivision within
each categories for more
explanations.
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LineLine-item budgets facilitate low levels of
detail for both planning and cost control
purposes.
Often, the accounting function of the parent
organization develops accounts and subsubaccounts on a companycompany-wide basis. In that
case, the library uses the company
accounting scheme.
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Advantages of Line Item Budgeting
Easy to prepare
– Most are done by projecting current
expenditures to the next year, taking cost
increase into account.
Easy to understand and justify
– It can be shown that the allocated funds were
spent in the areas for which they were
budgeted.
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Disadvantages of Line Item Budgeting
No relationship between the budget
request and the objectives of the
organization.
For more explanation refer:
LICM/Robert D. Stueart. pg.365pg.365-366.
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Formula Budget
Formula budget uses predetermined standards
for allocation of monetary resources.
Adopted by large library systems, e.g.:
academic library and state library for
appropriating state funds.
– After the criteria for budget requests have been
established, they can be applied across the board to
all units within the library system.
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Lesson 7: Financial
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Advantages of Formula Budget
Mechanical and easy to prepare.
Because of the formula budget’
budget’s application to
all institutions in the political jurisdiction, there
appears to be justification for monies requested.
Governing bodies have a sense of equity,
because each institution in the system is
measured against the same criteria.
Fewer budgeting and planning skills are required
to prepare and administer a formal budget.
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Additional advantages of Formula
Budget
Facilitate interinter-institutional comparison.
Facilitate comparisons from year to year.
Reduce paperwork in the budgeting
process.
Eliminate extraneous details.
Provide a systematic, objective allocation
techniques.
Connote mathematical infallibility.
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Weaknesses
Another weakness results from the formula
budget’
budget’s lack of identification with the parent
organization’
organization’s goals and objectives.
Another weakness emanates from the
unpredictable nature of the budget since the
formula is based on variables outside the
influence or control of the special library.
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Program Budget
It was introduced by U.S. President Lyndon
Johnson over 30 years ago and has been used
around the world.
The process is concerned with the organization's
activities or a program budget emphasizes the
library’
library’s activities, so that money can be
assigned to programs or services provided.
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By its nature, a program budget focuses
on the services the library provides to its
clients. Therefore, the program budget
more
readily
relates
to
overall
organizational goals and objectives.
Its attractiveness is further enhanced by
its usefulness when establishing priority
for library programs relative to the parent
organization.
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Performance Budget
Performance budgets share characteristics with
program budgets, but performance budgets focus
primarily on what library staff members do or what
functions they perform in the library’
library’s service
complement.
Tasks rather than programs are highlighted. Among the
functions displayed within a performance budget are
technical
services
(i.e.,
cataloging,
materials
processing); planning (budgeting, automation, employee
selection, interviewing, development; patron contact
(circulation desk, email & telephone contacts).
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Planning Programming Budgeting
System (PPBS)
PPBS was developed by Rand Corporation
and introduced to the Department of
Defense by Robert McNara in 1961.
President Lyndon Johnson directed all
principle government agencies to
implement it, and in 1965 it was being
used by all of these agencies.
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The PPBS approach combines the best of
both program budgeting and performance
budgeting.
The importance is on planning.
It begins with the establishing of goals,
objectives and controlling aspect of
measurement.
It emphasizes the cost of accomplishing
goals set by the library.
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This approach forces one to think of the
budget as a tool to allocate resources
rather than to control operations.
The steps in PPBS are:
– Identifying the objectives of the library.
– Presenting alternatives ways to achieves
those objectives – with cost benefit ratios
presented for each.
– Identifying the activities that are necessary for
each program.
– Evaluating the result so that correctives
actions can be taken.
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One of the most complex methods of long
budgeting, incorporating many elements of
long range planning techniques.
When fully operational, allows information
manager to make better decision on
resource allocations by developing an
overview of goals at the organizational
level, rather than unit level.
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The final budget will show the alternative
methods, together with their costs.
Final stage will involve;
– The development of measure that allow the
achievement against objectives to be
determine.
– The implementation of the selected program.
– The measurement of performance.
– The evaluation of the program’
program’s effectiveness
against the standards defined during the
budget development.
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ZeroZero-Based Budget (ZBB)
ZBB focuses its activities on answering two
basic questions;
– Are the current activities efficient and
effectives?
– Should current activities be eliminated or
reduced to fund higherhigher-priority new programs
or to reduce the current budgets?
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Lesson 7: Financial
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ZeroZero-based budgeting shifts the emphasis
from comparing present performance and/or
programs to the past or to the current activity.
Rather, zerozero-based budgeting requires that a
“clean slate”
slate” be the starting point for budget
development.
Therefore, the emphasis is on what will
happen in the future that corresponds to the
goals and objectives of the parent
organization.
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This “from scratch”
is viewed as an
scratch” approach
appropriate instrument to rank library programs by
cost/importance to organizational goals and to identify
and eliminate programs that provide minimal valuevalueadded (Zach 22)Once the value enhancing activities are
identified, then the attendant costs are developed.
Accompanying zerozero-based budgeting is the concept of
“decision packages”
packages”, a method used to examine each
proposed program and rank its merits vis a vis the parent
organization’
organization’s goals and objectives. Once the toptopranking programs are identified, a program budget model
is typically used to construct the resource details
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Accounting
Describes the processes involved in the
measurement and recording of financial
information and its subsequent
communication and interpretation as
background to decisiondecision-making within the
organization at all levels.
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Types of accounting:
a) Financial accounting
– record the transactions of the organization with
third parties (staff, suppliers, and customers)
b) Cost accounting
– record the internal activities of the organization
– process of establishing the cost in money terms of
the activity or process being reviewed.
c) Management accounting
─ process of combining financial and cost accounting
that provides the complete picture of the financial
state of the organization.
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Thank you
Lesson 7: Financial
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